Inflationary rally may spark breakout in undervalued junior miners

Jeb Handwerger
0 Comments|January 14, 2013

Investors are selling the dollar and U.S. bonds for risk on assets such as commodities and equities.

The equity markets are soaring to new highs following the Fiscal Cliff deal reached recently in Washington which continues to raise the debt and kick the can down the road.  It is just what we expected a few months ago, a conciliatory deal that will delay the inevitable for the time being.
 

Immediately, after the bill was passed by the House, Obama went back on his multi-million vacation to Hawaii after signing an executive order to increase pay for Washington politicians.
 

The U.S. government is broke, yet the politicians are living “la dolce vita” on the tab of the minority of Americans who actually work and pay taxes.
 

One of the highlights of the new deal is an extension of the costly unemployment benefits.  Maybe if the extensions were done away with more Americans would actually get back to work?
 

The World will begin to wise up and realize that the gold (NYSE: GDXJ, Stock Forum), silver (NYSE: SIL, Stock Forum), uranium (NYSE: URA, Stock Forum) and critical metal (NYSE: REMX, Stock Forum) miners may be the safest place to be as the U.S. is rapidly losing its status as an economic juggernaut.
 

The dollar (NYSE: UUP, Stock Forum) and treasuries (NYSE: TLT, Stock Forum) are reversing lower and may hit critical new lows.  Investors are selling the dollar and U.S. bonds for risk on assets such as commodities and equities.
 

The long term bond ETF TLT is breaking below the 200 day moving average. We called the top this summer. 
 

We may be in the beginning of a hyper-inflationary rally where interest rates could begin soaring and the dollar could hit new lows.  This could cause another decline in the housing market and put pressure on banks.
 

There is plenty of cash on the sidelines who may be seeking alternatives in the form of the undervalued commodities (NYSE: DBC, Stock Forum) and miners (NYSE: GDX, Stock Forum) especially as the dollar is forming a bearish head and shoulders formation and the Canadian Venture is breaking out above the 50 day moving average.
 

The bill to avert the Fiscal Cliff did not include any meaningful cuts to entitlements, while taxes went up significantly.  This does not sound like ingredients for an economic recovery. 
 

Do not be surprised with rising interest rates if the inflated housing and financial market turn down with further credit downgrades.

Instead, we would use this rally to sell overvalued U.S. equities especially U.S. banks (NYSE: XLF, Stock Forum) and housing (NYSE: XHB, Stock Forum) and diversify into the undervalued miners who appear to be bottoming and making positive technical reversals.
 

Gold, silver and the undervalued miners may be on the verge of a major turnaround higher.  The Venture looks like it may be on the verge of a breakout as it crosses above the 50 day moving average.
 

The time now should be used to accumulate some of the greatest natural resource assets on discount.  Expect large institutions and funds to continue to enter this small sector as the dollar turns lower.
 

Governments all around the world are flooding the markets with cheap fiat currency to artificially boost moribund economies.  They are not cutting entitlements like they should be doing.  Instead, they are raising taxes and inflating their way out of debt which may hurt any meaningful long term economic growth.
 

Precious metals will continue to grow increasingly valuable over the next few years as Asia has already begun to diversify away from treasuries and U.S. dollars and increase purchases of gold.
 

Central Banks in Asia have been buying gold and large sovereign funds, billionaires and mining companies are looking to acquire undervalued mining assets.  Stick with the smart money, rather than following the herd chasing after the latest fads.
 

Gold and silver may be on the verge of breaking above the 200 day moving average and starting its next leg higher.  Stay tuned.
 

Despite current weakness in gold around the $1650 area we expect a turnaround in gold with a new leg up to $1800 area and eventual breakout at $2000 in 2013.  

Despite noises heard in the Fed minutes of a purported exit from quantitative easing, Central Banks around the world have flooded the markets with fiat currency.
 

Around the world gold has outstripped every competitive currency for the past ten years, yet the mainstream fail to understand the importance of owning gold and the gold miners.  

Recently we have been in a sideways basing period in gold where the price has bounced between $1800 and $1550.  Gold may now be forming the base for a major breakout at $1800.


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